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Cheaper Phones Cushion Nokia's Bottom Line

It’s not everyday that Nokia’s shares get a boost, but today was one after the company reported a narrower-than-expected loss for the third quarter. Nokia posted a net loss of 68 million euros (or $94 million) for the third quarter, while analysts had been expecting it to lose 229 million euros, according to Bloomberg estimates. Its shares are up by about 8% in pre-market trading in New York.

There’s less than a week to go before Nokia is expected to announce what its forthcoming Windows-based smart phones might look like–yet today its results suggest that renewed strength in its traditional business of “feature phones,” or the lower-end, cheaper phones that tend to do very well in emerging markets, helped protect the Finish company’s bottom line. According to analysis done by Nomura, sales at Nokia’s feature phone business beat expectations by 29%.

The results were “driven primarily by its feature phone business,” Nomura’s Stuart Jeffrey wrote in a note to investors this morning. He added that while he was disappointed by gross margins for Nokia’s smartphone and feature phone businesses, the sheer volume of sales of low-end devices helped provide some leverage.

Feature phones again, though, saw some improvement in margins, rising to 10.3% in the third quarter, from 8.6% in the previous quarter. And as Forbes columnist Ter Kuittinen points out, Nokia managed the raise that margin even while the average selling price (ASP) of its feature phones “crashed” to 32 euros.

Rigorous cost-cutting by Nokia’s CEO Stephen Elop also seems to be running ahead of target: spending on research and development was almost 100 million euros less than Nomura had been expecting, while selling, general and administrative expenses were 80 million euros less.

Jeffreys notes that it’s still not clear how much of this improvement spells a brighter future for Nokia’s feature phone business, and he’s “cautious on a potential smartphone turnaround.”

Earlier this year Elop signed a strategic tie-up with Microsoft that would see Nokia move away from its long-standing but increasingly unpopular Symbian operating system, to embrace Windows Phone. All future smartphones would run on Microsoft’s mobile operating system. Next week at its annual Nokia World event in London, the company is widely expected to unveil some of its first Windows Phones to the world.

Much rests on this unveiling since fatter margins from smartphone sales are key to reviving Nokia’s profitability, and smartphones themselves are becoming more popular (and cheaper) in emerging markets.

“Failing to deliver the Windows Phones this year puts Nokia in a very dangerous position on the market,” says IDC’s Francisco Jeronimo, who adds that the company’s share of the smartphone market will likely decline this quarter to 15% from 17%, while its worldwide market share will slide to 29%, from 32%.

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If the reveal at Nokia World turns out to be the N800, and it looks like the leaks, then it seems it will be on a look and feel level a lot like the much-lamented N9. Which won’t put Nokia in front, but at least might put them back at the races. It feels like there is affection for the brand which could be leveraged back (in Europe) and up (in emerging economies) into Nokia/Windows smartphones…